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Employers Must Monitor 401(k) Accounts for Fee Reasonableness

May 20, 2015

 

The U.S. Supreme Court made its decision on a key 401(k) lawsuit Monday, and the takeaway for workers invested in retirement plans is a simple one: Employers must keep a close eye on recommended fund lineups and review their contracts with plan sponsors to make sure that fees are reasonable.

 

The retirement plan industry has been eagerly awaiting the outcome of Tibble v. Edison, a suit that was initially filed in 2007 and was among the first lawsuits brought by employees against their employers for fee-laden funds in the 401(k) plan.

 

In this particular case, the participants had claimed that their retirement plan had a selection of 40 funds, six of which were retail share class funds and thus more costly than institutional share class funds. In 2010, the U.S. District Court for the Central District of California granted the plaintiffs a judgment of $370,732, stemming from damages related to high fees in three of the retail share class funds. Litigation on the other three funds moved to the 9th U.S. Circuit Court of Appeals and eventually to the Supreme Court.

 

The employer in the case argued that the decision to add funds more than six years prior were subject to the statute of limitations and thus the employer could not be held accountable for an increase in fees during the interim..

 

Today, in its decision, the Supreme Court referred back to the common law of trusts, “which provides that a trustee has a continuing duty – separate and apart from the duty to exercise prudence in selecting investments at the outset – to monitor, and remove imprudent, trust investments.” The higher court then sent the case back to the 9th Circuit to consider the plaintiffs' claims that Edison (the employer) breached its duties within the six-year period, “recognizing the importance of analogous trust law.”

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